Earnings Call: Q3 2017

Oct 19, 2017

Good morning, and welcome to the United Rentals third quarter 2017 investor conference call. Please be advised that this call is being recorded. Before we begin, note that the company's press release, comments made on today's call, and responses to your questions contain forward-looking statements. The company's business and operations are subject to a variety of risks and uncertainties, many of which are beyond its control, and consequently, actual results may differ materially from those projected. A summary of these uncertainties is included in the safe harbor statement contained in the company's earnings release. For a more complete description of these and other possible risks, please refer to the company's annual report on Form 10-K for the year ended December 31, 2016, as well as to subsequent filings with the SEC. You can access these filings on the company's website at www.ur.com. Please note that United Rentals has no obligation and makes no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances, or changes in expectations. You should also note that the company's earnings release, investor presentation, and today's call include references to free cash flow, adjusted EPS, EBITDA, and adjusted EBITDA, each of which is a non-GAAP term. Please refer to the back of the company's earnings release and investor's presentation to see the reconciliation from each non-GAAP financial measure to the most comparable GAAP financial measure. Speaking today for United Rentals is Michael Kneeland, Chief Executive Officer, William Plummer, Chief Financial Officer, and Matt Flannery, Chief Operating Officer. I will now turn the call over to Mr. Kneeland. Mr. Kneeland, you may begin. Well, hello everyone, and thanks for joining us this morning. I want to open the call by saying that we are extremely pleased with the strong third quarter results we reported yesterday. It was a pivotal quarter and one that required disciplined execution in light of many different dynamics at play, both internally and externally. Some were strategic actions we took to grow the business. Others were market conditions that were broadly positive for our industry, where we could realize more value through scale. Then there were the hurricanes, which created immediate challenges and longer-term opportunities. Our third quarter results and our new full-year guidance were shaped by these dynamics. Well, let's start by recapping some of the financial highlights. As a reminder, the year-over-year numbers are pro forma for the acquisition of NES in April, pro forma meaning the combination is presumed to be in effect for the third quarters of 2016 and 2017. One of the reasons we give pro forma numbers is to be as transparent as possible about how the business is performing. In the third quarter, our performance exceeded expectations. Here are four key metrics that reflect well on our execution in the quarter. One is our volume of equipment on rent. We delivered volume growth of 7.6% year over year. This was a solid step-up versus the prior two quarters. Second is rates, a major win in the quarter. We generated positive rental rates both sequentially and year over year for every month in the quarter. This was the first period since the second quarter in 2015 that rates were positive year-over-year. If you recall, last quarter, I said that our rate trend looked encouraging, but we wouldn't rest. We didn't rest, and I can promise you that we won't rest going forward. The industry backdrop on rates has become more constructive, and now that we've turned the quarter, our team is excited to build on that. Third is time utilization. This metric has been running at record highs, and we delivered again in the third quarter. Utilization increased 180 basis points year-over-year to 71.9%. That's not only a milestone for the quarter as a whole, but also for each of the months individually. Fourth, free cash flow through September was a solid $582 million, which is ahead of expectations. That's after nearly $1.5 billion of gross rental CapEx and another $52 million of merger and restructuring costs. Before I move on, I want to give you an update on our integrations. The heavy lifting behind us on NES, we're tracking better than the $40 million of cost synergies we projected. With revenue synergies, we remain confident that we'll achieve the $35 million target by year three. The Cummins Rental acquisition is just two months old, and it's already paying dividends. The assets and the team we brought on board are fully integrated into our power and HVAC businesses. Neff, as you know, closed earlier this month, so that's a fourth quarter impact. Here's an update on the integration. As of this week, the acquired branches are all running on our operating system. That's going to jumpstart our collaboration on sales and fleet. The rest of the integration is right on schedule. We're merging the back office, sales, the operating teams, and adding telematics to the fleet. We're analyzing the combined operations to identify efficiencies as well as cross-sell opportunities with our combined customer base. None of these activities would ensure a successful acquisition if we didn't have good people. What we got with Neff is great people that come from a culture similar to our own. We knew that was true going in, and it's nice to see that firsthand. The step up in scale from Neff gives us a larger platform for growth going into 2018, just as NES did in the spring. Both acquisitions are timed to capitalize on the continued strength of the cycle. In fact, the operating environment in the third quarter was among the best I've seen in a while. Our core general rental business, which excludes specialty, jumped 4.7% year-over-year pro forma. From a company-wide perspective, both the U.S. and Canada are trending well. Our business in Canada is up 9% in local currency. In the U.S., the coast remains strong, and the Gulf and Southeast are starting to rebuild after the hurricanes. Our regions are broadly positive in their projections. In addition, there's a lot of evidence pointing to sustained project activity, particularly in commercial construction. A customer survey indicated that optimism has increased sequentially in the third quarter. Given the demand is so broad, I thought I'd share some insights into our vertical activity. In construction sector, our revenues from both non-residential and infrastructure increased by double digits year-over-year. That would have likely been the case even without the NES contribution. Infrastructure is the target of our Project XL initiative, so clearly that's paying off. Residential construction is our core business because of the mix of commercial projects are so diverse, a double-digit increase in that space is exciting to see. In the industrial space with oil and gas, we saw large year-over-year revenue increases across drilling, production, and transmission. Refining was the only notable headwind, and it's partly due to the storms. Elsewhere in industrial, the standouts in the quarter were the food and beverage, manufacturing, and pharmaceuticals. By contrast, activity in the chemical processing industry was flat as expected. Overall, I'd say that we're in the strongest position yet to capitalize on the growth in industrial. I want to comment on specialty operations. Our trench, power, and pump segment delivered a major increase in rental revenue in the quarter of 33%, primarily through organic growth. When I break that out, trench was up 16%, power was up 44%, and pump was up 46%. I'm most impressed by what the teams did with the margin. Rental gross margin for that segment as a whole increased 280 basis points to an outstanding 54.8%. We're on track to meet our target for 16 specialty cold starts by year-end. In 2018, you'll see us continue to grow that segment as a cornerstone of our strategic plan. I also want to bring you up to date on the hurricanes, Harvey, Irma, and Maria. We always hope for a quiet hurricane season, and while we don't always get our wish, this time the storms were particularly devastating. Our people are to be commended for how quickly they responded across our network. Harvey dislocated hundreds of our employees and customers in Texas. Some of them lost their homes and businesses. In Florida, the Keys are still digging out, and the West Coast has a long recovery. It just wasn't limited to those two states. Louisiana took a hit, as did Georgia. In Puerto Rico, where Maria was catastrophic, we've been shipping fleet to our national accounts that are helping out with the recovery. Our best estimate is the storm-related business accounted for about $6 million of incremental revenue in September. I'll share something else about September. In the aftermath of historic hurricanes, in the middle of the integrations, and at a time of peak seasonality, we had just three minor reportable incidents for the entire month. That's a new safety record for us. Something else came out of Harvey that makes me proud. I've spoken about our United Compassion Fund before. Our employees donate to the fund to help their colleagues. After Harvey hit, the Compassion Fund's board, which is made up of branch employees, voted to make Neff employees eligible for emergency grants, even though the deal had not yet closed. That tells you everything you need to know about our culture. So now let's talk about CapEx. Our new guidance increases our CapEx plan to up to $200 million this year. The broad growth in end market demand is starting to strain our fleet in some geographies. Our customers need equipment for projects, and we need to be there for them. This is consistent with our strategy of protecting customer relationships that generate high returns over time. We'll use a portion of that $200 million to address the natural disasters. We expect this quarter to be a time of severe need for many of our customers. We are comfortable pulling some CapEx forward for that purpose. As always, we can be very flexible in adjusting the timing and the amount of our spend on a relatively short notice. I will close with this comment on the quarter. The most powerful tailwind behind our growth has been our disciplined execution across a combination of factors. Our Project XL initiatives, prudent investments in fleet, accretive acquisitions, and most of all, a robust market demand. We expect the same combination to bear fruit in the fourth quarter, and our updated guidance reflects that. The fourth quarter is also where we see new benefits from the Neff acquisition, a further injection of rental CapEx, and the market activity that we think will exceed normal seasonality. In short, we have added horsepower at a time when the cycle is trending in our favor. That gives us a great deal of confidence about where we go from here. Now Bill is going to review the numbers in detail, and then we will go to Q&A. So over to you, Bill. Thanks, Mike, and good morning to everybody. As Mike said, there is a lot going on in this quarter, so I will get through the bridges pretty quickly, and then we will try and address some of the other items that are present in the quarter. Starting with rental revenue as usual. Let us go with the third quarter of 2017 total, $1.536 billion. That is up $214 million over last year, or 16.2%, as you have seen. We had a nice result in the quarter for ancillary and re-rent revenue, up 24 on ancillary and nine on re-rent. Really that increase reflects the impact of NES, along with the higher volume across our business overall. So ancillary is things like delivery, fuel, our Rental Protection Plan, and so forth. A nice increase there, up about 18% over the prior year. Re-rent is re-rent of equipment. That was up 19% as well. The OER increase totaled $181 million. Volume was the major driver there. Volume attributed $208 million of increase year-over-year, and then rate added another million on top of that. The deducts were replacement cost inflation, calculated in our usual way. That cost us about $17 million in the quarter. Then mix and everything else was a headwind of about $11 million there as well. So those are the key pieces for the revenue change. The only other highlights for revenue include the impact of the storms. Michael mentioned that we recognized about $6 million of revenue incrementally for storm-affected areas in the quarter. That is in the year-over-year change. Looking ahead, that $6 million should grow to something like $20 million of storm-related revenue impact in the fourth quarter. Moving to used equipment sales. $139 million of proceeds in the quarter. That's on a sale of $238 million of OEC equipment in the quarter. So $139 million represents a $27 million or 24% increase year-over-year in proceeds from used equipment sales. That included about $26 million of proceeds for former NES equipment that were sold in the quarter. I call that out because as in the second quarter, those units brought along a higher margin based on the greater depreciation attached to the NES equipment. So that impact is coursing through the overall result in the quarter. It shows in the margin. Our margin in the quarter for used equipment sales on an adjusted basis was 56.8%, and that's up 10.4 percentage points over last year. So the NES impact is certainly part of that year-over-year increase, but not all of it. We are selling used equipment into a pretty strong market overall. I think that's supported by a number of external measures, but it's also very directly supported by our results year-over-year in our retail sales. On a like-for-like unit basis compared to last year, we were selling equipment in our retail channel at something around 5% higher prices than we did last year in the third quarter. So a robust market overall, supported by the sale of older and more depreciated NES units, explains that 56.8% margin for the quarter. Whatever way you want to look at it, though, it's a pretty good result for us. The average age of the units that we sold were about 93 months, and yet we still brought back over 50%, 53.2%, in fact, of the original value of the fleet in our used equipment sales. So a pretty strong result down the line. Moving to adjusted EBITDA. $879 million is an increase of $132 over last year or 18% increase, and the margin in the quarter was 49.8%. That's 30 basis points better than last year. Similar story here. Volume is the main driver, a positive $139 million impact from the 18% increase in volume, and rental rates contributed only another million or so positive there. The strong ancillary result we calculate is $14 million of positive year-over-year contribution. Then our used sale result, as I called out before, the margin was up about $27 million year-over-year. Other lines of business contributed another $4 million outside of used rental and the ancillary that I called out previously. The deducts, fleet inflation we calculate is $12 million of headwind. Our merit, our usual $6 million in the quarter. The biggest deduct was the increased bonus accrual that we had in the quarter. Compared to last year, our bonus accrual program was up $28 million. That's an increase reflecting the strong performance this year, but it also compares to a slightly lower than normal number last year, as many of you might recall, we adjusted our bonus program accrual downward in the third quarter of last year to reflect its performance. So that's the biggest headwind. That leaves about $6 million, $7 million of mix and other negative year-over-year to explain the $132 million overall impact. Just to call out the impact of the storm-related revenue on EBITDA, that's $6 million of incremental revenue from the storm areas translated into about $4 million of EBITDA benefit spread throughout these various lines in the third quarter. As we look to the fourth quarter, the $20 million of incremental revenue in the storm areas that I called out, we expect to translate into something like $12 million of EBITDA benefit in Q4. Flow-through from this EBITDA was 51.2% in the quarter, but that does include that bonus accrual increase that I called out. If you adjust for that $28 million, our flow-through in the quarter would be 62% for the quarter, which is in line with the 60% that we typically might talk about. Moving to free cash flow. Mike called out the $582 million of free cash flow. Once you adjust for $52 million of merger and restructuring related cash outflows, that number moves up to $634 million year to date through September. I point out that number because that's the basis on which our guidance is given for the full year, excluding the merger related and the structuring charges. So it's a pretty strong free cash flow result so far this year. It is down from last year at the same time, but last year was a particularly strong free cash flow year for us. If you're interested in the year-over-year bridge, the main driver is obviously $200 million year to date of increased adjusted EBITDA. Is a good guy, but against that, our rental CapEx is $340 million higher than it was last year, so that's a deduct. Our cash taxes are higher by about $100 million so far this year. That's a deduct. Then the net of interest paid, merger and restructuring charges, and all other working capital adjustments gets you to the 264 delta between this year and last year. Our rental CapEx expenditure for the year totals $1.5 billion so far year to date. Again, that's up about $340 million versus last year and reflects the higher planned spend, but also just the overall strength in the market that we've been addressing with our rental spend and maybe some timing differences this year versus last year. That net rental CapEx year to date is $1.1 billion, and again, it's up about $325 million or so versus last year. In debt activity and liquidity, it was a very busy quarter for us in our debt transactions. In addition to financing the Neff acquisition, we also refinanced our 6 1/8 note. We upsized our accounts receivable facility by about $50 million. We upsized our ABL by about $500 million. We called the remaining balance of the 7 5/8 notes that were still around all during the quarter. The 7 5/8 redemption will actually fund later this month in October, so it didn't show in the year-end balance of debt, but the activity was very robust in the quarter. It left us with a net balance at the end of the quarter of a net debt balance of $8 billion, up a little bit from last year. Again, I'll remind you that does not include the settlement for the Neff purchase. That settled on the 2nd. So when you add that funding net debt on top, our net debt balance right now is something about $9.4 billion. We also improved our liquidity during the quarter. It shows at the end of the quarter as $2.9 billion, but that did not take into account the payment for Neff. If you make that adjustment, we finished the quarter with about $1.6 billion of total liquidity, including ABL availability and our cash balance. Let me touch on share repurchase just briefly. You saw in the announcement that we announced the reauthorization of repurchases under the existing billion-dollar repurchase program that we have, and that program has about $370 million remaining to be executed. The reauthorization is basically housekeeping. When we initially announced the billion-dollar repurchase, we put a time limit about 18 months on it. While we had the program paused as we settled in on the NES acquisition and got ready for the Neff acquisition, that 18-month time period expired, and this was just a reauthorization of the same program. Our intent is to evaluate our cash flow position for the remainder of this year after the Neff settlement, and as we build our confidence that cash flow is on the path that we expect, we would expect to begin executing under that program with the intention of completing it by the end of 2018. Real quickly on Project XL. We have continued to make good progress on the Project XL initiatives toward the $200 million run rate impact that we've called out by the end of next year. A variety of the projects are all moving along nicely. We did put in the investor material a look at one of the other initiatives under Project XL, which is our focus on improving our realization of used equipment pricing. We look to improve it relative to fair market value of the units that we sell. We gave you a schedule that just shows you how we progressed on that year-over-year improvement measure throughout the course of this year, and the cumulative EBITDA impact that we realized during the course of this year because of that improvement. I think it shows up in the commentary that I made about our used equipment results in the quarter earlier, and it is just one more view of the kind of thing that we are doing under Project XL. Real quickly on the integration of NES, just to give you a synergy update. As Michael mentioned, the integration is essentially complete at this point, with the major actions having been taken already. Our run rate now for the realized synergies is nicely higher than the $40 million that we initially called out. For the sake of discussion, we could call it about a $40 million run rate. In fact, in the quarter, we realized about $10 million- excuse me, about a $45 million run rate, I would say. About a $45 million run rate. In the quarter, we realized just a little over $10 million in Q3, and that puts us on a path to realize something north of 20, call it $23 million-$25 million in the full year of 2017. So nice progress there for the expense savings synergies. Regarding the fleet procurement savings, we called out a range of $5 million-$10 million, and we believe that we'll be delivering at the higher end of that range once it's all said and done. Let me wrap up with some commentary on the guidance update that we gave. You all have seen the numbers, but just to add a little bit more color, the increase in our EBITDA and revenue guidance really reflects a couple of major drivers. Obviously, the impact of adding Neff in Q4 is included there, but it also reflects just the overall strength of the business that we saw build during the third quarter. I've called out already, the impacts of revenue and EBITDA from Neff additions. Just to be, excuse me, I haven't done Neff. I did the storm-related. Just to give you some more insight on what Neff is included in that guidance update, we expect the revenues from Neff in the fourth quarter to be about $110 million, and we expect EBITDA to be somewhere in the neighborhood of $55 million from Neff alone. On CapEx, Mike hit the real motivation behind our CapEx increase. Certainly, partly due to the demands from the hurricane-affected areas, although not from replacing fleet that was damaged. That amount was fairly minimal for us. If you look at both the Harvey and the Irma areas, in total, we lost about $13 million of OEC fleet due to the storms. Clearly we'll have to replace those, but it's not a major part of the increase in CapEx that we guided. Really, that increase was importantly guided by the overall demand that has spiked in those hurricane-affected areas. We've moved about $100 million of fleet into the hurricane-impacted areas, and so we will up our spend a little bit to cover the fleet that came out of other areas into hurricane affected, and to put some more fleet back into those areas that donated into the hurricane areas. Then we're going to add a little bit more fleet that will land in the hurricane-impacted areas to help with what we expect to be a nice increment of demand from the rebuild activity as that plays out. Maria, just to mention that we haven't done a lot with Maria. We've certainly shipped some equipment to customers who are taking it over to Puerto Rico. We expect that there'll probably be a little bit more demand that plays out there as we go forward, but haven't really put a strong number to that just yet. Michael mentioned that some of the increase in CapEx we're thinking about as a pull forward from next year, and that's certainly the case. That is the way that we're managing the uncertainty around how long the rebuild increment and demand will play out. If we see it play out for a longer period of time, then we can increase our spend next year to replace what was pulled forward into this year. But if it dies down more quickly than we expect, then we can adjust by thinking about the spend this year as pull forward from next year. Hopefully that gives you a little bit more color in how we're thinking about CapEx, but certainly, we can address it further in Q&A if a question is still out there. Finally, on free cash flow, we increased our guidance at the midpoint, something like $75 million. Certainly that reflects the increase in CapEx, net of incremental EBITDA and any working capital impacts, and just the other components of our free cash flow. Importantly, our cash tax expectation in the quarter and in the year is lower as a result of the extra CapEx and the bonus depreciation attached to that, but also of the Neff addition. You all remember when we announced Neff that it brought along a nice cash tax benefit with the step-up in depreciation and a balance of NOLs that Neff added. As that plays out in the fourth quarter, it benefited our cash taxes, and certainly was a part of that increase in our guidance for the full year. That's a lot, but we certainly wanted to give you a little bit more detail on a variety of these areas to help give a sense of the impacts in the third quarter and what we think in fourth quarter. But certainly, we'd be glad to answer any questions about anything I may have missed in Q&A. Let's go to Q&A right now. Operator, let's open up the lines. Certainly. Ladies and gentlemen, if you have a question at this time, please press star, then 1 on your touch-tone telephone. If your question has been answered and you'd like to remove yourself from the queue, please press the pound key. Our first question comes from the line of David Raso from Evercore ISI. Your question please. Thank you very much. Yeah, I was just trying to think through what you just reported and what you guided. How does it sort of influence how I think about your earnings power next year? What caught my eye was the implied fourth quarter. You have an incremental EBITDA margin implied around 47%, which is actually a little lower than the 51% you just did. I'm just thinking about the incentive comp drag I would think would be a little lower than we just went through. NES standalone comes in at higher EBITDA margins than 47%. And maybe most importantly, if you are thinking about 2018, it seems like the fourth quarter might be the first time in, I do not know, two years, three years, where your rate growth year-over-year could be as much or more than your fleet utilization growth, which historically is a positive mix for profitability. Can you help us understand why the incremental EBITDA margins will be worse in the fourth quarter than the third quarter? Okay, David, I will start on that one. Regarding our bonus accrual, you are right. It should not be as high as what it was in the third quarter. But I do remind you that we gave ranges, and the ranges, I would argue if you look at the extreme of the ranges, it might be a little bit more normal in terms of the incrementals in Q4. Oh, okay. Thinking that through then to the 2018 thought process, the way you thought about CapEx, and given what appears you are going to have some carryover from rate utilization obviously is also going to be healthy, especially in the hurricane areas in the fourth quarter. When you set up the framework for 2018, and it is framework, it is early, is next year a year where the framework is rate growth should be higher than your utilization growth? I am just given how high the utilization is and how we are exiting the year, I would think that would be base case. Just so I understand, so again, I think about the potential implications on incremental margins. Sure. I do not make a link between rate growth and utilization growth the way your question implies. What I would say separately is that our utilization growth has been pretty strong over the course of this year and actually going back into last year. And it is, in my view, not reasonable to expect that we are going to continue to deliver 160, 180 basis point improvements year-over-year forever and ever. So I would not be surprised to see that year-over-year comparison come down a little bit in 2018. So that is the way I would think about that. Rate growth, we have established a momentum in the right direction, right? The question is how far can that go? And that is really going to be handed to us by the market as well as our execution. I feel confident that our execution and focus on rate is going to be good. Will the market continue to offer up the kind of year-over-year improvements that we started to see here? Time will tell. Those two components I think about separately, but I think in any case, both of them are set up nicely going into 2018, and we'll execute as best we can in 2018 to take advantage of what's there. I'll end with this, just so we're clear, though, you're saying you think of them separately, but fundamentally, rate provides a better incremental margin than utilization, correct? Absolutely. Okay. All right. We certainly want to get as much rate as we can, and do it within the operational framework that allows us to deliver top utilization improvement, right? That's how we're thinking about it. The question is: Is the market environment there that allows us to do it? If it is, I think we can deliver pretty effectively as you saw in Q3. All right. I appreciate the time. Thank you. Thanks, David. Thank you. Our next question comes from the line of Tim Thein from Citigroup. Your question please. Great. Thank you. Bill, just to follow up on rates, can you update us in terms of where you are today in terms of repricing the NES contracts? At least based on the pro forma you gave last night, it would appear that you did make further progress in terms of narrowing that spread. Just kind of wanted to get an update there as to where we sit today on harmonizing those contracts. Then just as related to that, based on the midpoint of your revenue guidance for 2017, what would the carryover impact be at the midpoint in 2018 on rates? Tim, this is Matt. I would say as far as NES contract harmonization, they didn't have a lot of fixed price business in NES. That would be an area where you would actually technically go to the customer and harmonize any gap that would exist between the two. We're not really tracking, at this point, any NES standalone metrics. The business is so fully integrated right now, as Mike had mentioned in his opening, that the customers are seeing it all as one, and most of the pricing is spot pricing at this point. I will say that wherever there are gaps, they're all in one price zone right now. You continue to see movement much closer towards United historical pricing. But we're also very cautious that these are relationships that we We value and we paid a lot of money for, and we're going to maintain those relationships. It's not going to directly answer your question, but I think directionally, you'll see in the rate results that we've done a good job of creating a lesser gap. Yeah. Tim, on carryover, you guys can all fill out a spreadsheet as well as we can and make your own assumptions about how the rest of this year finishes out. But if you make any reasonable assumptions, I think you're going to be a point of carryover, if not a little higher, going into next year if this year finishes out with anything decent. The backdrop is a good starting point. But that's not where we want to rest on our laurels, right? We want to continue to try and manage to rate, and do it in the context of what the market's offering. Okay. Thanks a lot. Thank you. Thanks, Tim. Thank you. Our next question comes from the line of Rob Wertheimer from Melius Research. Your question, please. Thank you, operator, and good morning, everybody. Morning. Rob, you're effectively achieving record time utilization, and you guys have worked hard in getting rate also, which is lovely. You guys have worked hard on operational improvements. Can you see at a branch-by-branch or region-by-region level, whether you can actually push time utilization higher than you might have thought two, and three, and four years ago, and therefore, you can get more out of less fleet? Or do you think you're actually at pretty good levels here, and if the market's strong, you'll continue to add fleet to keep it at this level? Yeah, Rob, so we certainly are at pretty good levels considering we're at record levels. We had already enjoyed significant time utilization advantages over the industry benchmarks. I think that we ask our questions all the time is how high can we go? Density helps us with that, and I think that's some of what we're seeing as we've grown to be a bigger company. Density in marketplaces certainly gives you the opportunity to drive higher time than you could have in the past. It'd be difficult for me to say that we're going to beat the record year next year, but I guarantee you that is our goal, is to continue to push time utilization as high as possible. Yeah. Look at September, right? 73.6% utilization in the month of September. Imagining operating at that kind of level all year long, it's certainly something that would be great to see, but it's a real challenge, right? It's tiring to operate at that level as we're configured today. Our lean initiatives and our focus on improving our operations are all about getting us more a capability of operating at higher levels of utilization. I think it's fair to say a few years ago, the thought of being at 73.6% in September might have been intimidating some people. Well, we just did it. Yeah. There's opportunity to do better. That's what we're trying to do on a continual basis. That's wonderful. Can I ask you a little bit of a more, same idea, but a little bit more of a structural one. Can you see yet results from Total Control that go beyond anecdotal and serve to indicate or not that you can widen your competitive gap versus the industry, and how you're able to provide better efficiency to your customers' utilization or otherwise? I mean, just maybe see if that's widening out in the data versus initial results. Yeah, absolutely, Rob. Our penetration with our TC customers continues to grow. It's a big differentiator for those customers that value that tool. We'll continue to separate further by enhancements to those tools. Technology's moving quickly, and we have to keep up with it. If you think about just GPS alone, we have over 200,000 units with GPS telematics on it right now, and our goal is now 270,000 with the addition of the extra Neff and NES fleet. So we continue to fill out that value prop to our customers on technology telematics, and TC is a big part of that. Thanks. I'll turn it over. Appreciate it. Thanks. Thanks. Thank you. Our next question comes from the line of Scott Schneeberger from Oppenheimer. Your question, please. Hey, Scott. You on mute? You there? Mute? Guys, sorry. I was on mute button. Good morning, everyone. Yeah, two quick questions. I will ask them both up front. One on the CapEx pull forward, I understand the storms and strong demand environment. Could you discuss, is there any pricing benefit to that with the OEMs since we are in that season, and how we might think about that as a pricing perspective next year? The second question is, with the mention of the resumption of the share repurchase program, are we taking a step back here from the M&A pipeline? Just curious the implications of that, and if not, kind of areas you are looking at. Thanks. Yeah, Scott, I'll take the second. I'll start with the second, and then of course, Matt and Bill can jump in on the first one. But no, I think Bill outlined it as we talked about a little bit of the housekeeping. But we look at every acquisition on its own merits. The team has done a wonderful job of providing lots of dry powder for the company. And we're very disciplined about our approach. That will not change. I've talked about it ad nauseam about how we think about strategic fit, financial and cultural. And we will continue to look and see what those opportunities bring. We're not afraid to do an acquisition, and we're not afraid to pass on them either. So I think the disciplined approach that we've had has yielded great benefits, and you're seeing that in some of our results. As far as the first question, I'll pass it over to Matt. Yeah, sure. So most of the fleet that we buy are from strategic partners that we set up on an annual basis. We don't leverage them in a last-minute order, and they don't leverage us when things are tight. So there's really no movement there in pricing. These are more important longer-term relationships that we have with our vendors, and we're very pleased with the way we're treated. All right. Thanks very much, guys. Yeah. Thanks, Scott. Thank you. Our next question comes from the line of Joe Box from KeyBanc. Your question, please. Hey, Joe. Yeah. Hey, good morning, guys. So maybe just to dovetail off Scott's question, it seems like utilization is pretty tight across the entire space right now. Curious your sense for maybe the industry's appetite to grow fleet, and then related to that, is there any risk right now that the OEMs actually can't deliver on your $200 million CapEx increase? Yeah. Go ahead. No, please. Joe, no. We have POs aligned, slots aligned. We've got everything we need to execute on that. If the demand remains, we'll go all the way up to that 200. If not, it'll be towards the 1,750. But we're all dialed in with as far as slots and deliverables from the OEMs. Got you. On the market dynamic, the market dynamic will be the market dynamic. We don't know what the competition will do or not do. We are myopically focused on our customers and the value proposition that we can bring in. But we're cognizant of it. We watch it. And again, we are very disciplined around our capital spend. Maybe just a follow-up. I'm just trying to understand some of the moving pieces for CapEx and free cash flow for next year. Certainly not asking for guidance, but directionally, how should we be thinking about total replacement need here? Obviously, you guys have added Neff, which probably needs some replacement. And then are we thinking more or less replacement need as we start to climb out of maybe the lack of purchases from 2009 to 2011? Yeah. Joe, so regards replacement, if you think about it as the legacy United business needing to replace, we've been selling something like $1 billion of OEC before the NES deal. So if that continued with a little bit of growth, plus you add a need for replacing, let's say, 100 each for NES and Neff, just to use round numbers, that gets you up to a $1.2 billion kind of replacement spend at an OEC basis. And obviously, the inflation impact there you have to add in, right? Because every unit that you buy today replaces a seven, eight-year-old unit at 15% lower price. So you add 15% on top of that, you're probably in the neighborhood of a $1.4 billion kind of replacement need out of your CapEx next year. So that's a rough starting point. And then we'll debate, of course, growth on top of that, and that'll get us to a 2018 CapEx number. We're going through that process right now, our budgeting process. Clearly, we haven't decided on the final number. But in terms of replacement spend, that's the logic that's a pretty good starting point. That's helpful. Thank you, Bill. Thank you. Our next question comes from the line of Ross Gilardi from Bank of America. Your question, please. Hey, good morning, guys. Morning. Hey, Ross. Good morning. I want to ask you guys just a couple of macro questions. First on interest rates in general, we've obviously been in this low interest rate environment seemingly forever now. What happens to the business and the rental industry if we get a spike in interest rates? How should we think about your position versus some of the smaller players and so forth, and just the overall growth dynamics? Yeah. So we've always said, it depends on what caused the spike in interest rates, right? Obviously, the cost of interest goes up, but if the spike is driven by incremental economic activity across the economy, then construction, you would expect to benefit from that. And so the net-net impact might be positive associated with a spike in interest expense. As it relates to sort of the competitive position of us versus the rest of the rental industry, I certainly feel great about the position that we're in, right? We've got a very low level of floating interest in our overall debt structure. And so we would feel an impact, but I'm going to go out on a limb here and say it might be less of an impact than some of our competitors. That should put us in a little bit more advantaged position in terms of financial performance. Could it stress some of our competitors to the point of them impacting the actions they take in the marketplace? I guess it could, but it depends on the individual competitor that you're talking about. Okay. Thanks, Bill. That's helpful. Do you think the repricing on NES and, I imagine you're going to go through some of that with Neff as well. Do you think the repricing of the contracts, because they're pretty big players in the grand scheme of things after you and Sunbelt. Is that contributing to the general pricing environment that we're seeing in the market? Yeah, Ross, this is Matt. There's some contribution to it, right? From NES. Neff, we're pretty aligned across the board about our pricing, our pricing methodology, and the culture around pricing. But with NES, we got a little bit of lift from that. I think more importantly, even in our non NES overlap markets, we have seen similar pricing increases. Although it's not a driver for the macro, it is certainly a couple of bits improvement over the normal. Got it. Thanks, guys. Thanks. Thank you. Thank you. Our next question comes from the line of Joe O'Dea from Vertical Research Partners. Your question, please. Hey, Joe. Hi, good morning. Morning. First, just thinking about some of the EBITDA lifts next year related to Neff and NES. Could you talk about what's remaining on the stub portion there, just with some of the seasonality that we could see in 4Q or 1Q and stuff that wasn't captured with them? What you're thinking as we roll into 2018 on that, and then any additional contribution on some of the realized synergy savings. Hey, Joe. It's Bill. I'm going to ask you to ask the question again. I'm missing your question. Sorry. Really just looking at the tailwinds to EBITDA from Neff and NES, as you get full realization of those next year, and then on top of that, you get some cost synergies. I think if your question is about sort of the full year effect next year of adding NES and Neff, we'll have an extra quarter of NES next year. This year, that number was about $30 million, so that'd be a good starting point. Call it $30 million of impact from adding a quarter of NES. For Neff, call it $150 million for adding the three quarters that we didn't own it next year. And then the synergies for NES, I called out north of $20 million of synergies realized this year. If you're at a 45 run rate, call it $25 realized this year, that nets out to an incremental 20 year-over-year. So that's a benefit next year. For Neff synergies, you can pick your own number, right? We said $35 of synergies fully realized at the end of two years, I think it was. So $25 million, $30 million of synergies realized during the course of next year. You pick. That is an impact there that we might see. Is that helpful? That is perfect. Thank you. Yeah. Then just in the press release, it noted fourth quarter market activity would exceed normal seasonality. Just any additional context on that. In particular, how do we think about if there is such a thing as normal seasonality for rates and based on the EBITDA margin that is implied, it does not look like you are suggesting better than normal rate experience. Yeah, Joe, this is Matt. I think that was more referring to demand and partly an explanation of why you saw an increase in the capital spend ranges. We normally would not spend that much in a Q4, so we thought it noted an explanation. But that demand is there, and it is not all just storm-related. As far as rate, I mean, we are going to always push to do more, but we all understand the seasonal patterns of rate, and all of this is embedded in the guidance that we just updated. Can you add anything just on the months? I mean, normally sequentially, I think we'd still see growth in October, maybe a little bit November, December, sometimes under a little bit of pressure. Anything that you could do in terms of adding numbers to that? Yeah. I mean, normal, what's normal, but if you go back over a number of years, you would see a positive October. November can go either way, depending on the year that you're in, and December typically would be a slight negative. But how much on each of those is always the challenge, right? So I'll leave that to your imagination. Perfect. Thanks a lot. Thank you. Thank you. Our next question comes from the line of Seth Weber from RBC Capital Markets. Your question, please. Hey, Seth. Hey, good morning, guys. Hey, good morning. Good morning. Hey, Seth. So just going back to the CapEx pull forward question. Is it safe to assume that most of that is tilted towards gen rent versus specialty? I guess the spirit of my question is, if you look at dollar utilization for the quarter, it was actually down for booms and lifts and forklifts as well year-over-year. Earthmoving was up. So can you give us any flavor for where that incremental CapEx is going? Maybe any color on why dollar utilization was down for those categories year-over-year? Sure, Seth. Well, first, I think you'll have to remember, if you're looking at a year-over-year basis, you're looking at a comp that didn't have the NES boom business in it, and then does in Q3 this year. So that was a little bit of drag on the age that we've been moving down and a little bit of drag on the dollar ute, which we'll continue to improve that spread as well. As far as the pull forward spend, it looked very much like what our normal spend would be, maybe a little more heavily weighted on specialty because some of the immediate response stuff that we needed and a little less on booms and reach forks for the same exact reason we had more of those around. Other than that, looks similar to our profile. Almost all of it's core fleet and very fungible assets. Okay, so more on specialty, Matt? That's what you're saying? Yeah, a little bit more on specialty just because of some of the remediation, some of the power, and we might even got some more pumps, as busy as pump was, to help. Okay, that is great. Thank you. Then maybe Bill, just a quick follow-up on Project XL. Appreciate the disclosure of the $10, I think it was $10 million or $11 million from that one initiative on the used sales. Can you just give us an update, kind of where you are at? We are getting close to needing to have some sort of line of sight to that $200 million number. Can you help us frame out the steps to get, how we should think about the cadence to get to that $200 million run rate number versus where we are at today? Sure, Seth. We discuss this every quarter since we have talked about Project XL, and we have debated about the best way to tell the story, in a way that is useful. The way that is useful is, what is the incremental impact on our profitability. The challenge that we have, and I am giving you background here, but the challenge that we have is that the individual projects each have their own set of metrics, and those metrics may not necessarily directly tie to an incremental EBITDA impact. We are looking at various ways to try and back out the things that you should not count as incremental EBITDA. That is a long-winded way of saying that, I do not have a specific number for you right here and now on the incremental EBITDA impact of each of those projects. What we have tried to do is to pick out the ones where we feel like there is clarity around the incremental EBITDA impact. Obviously improving the realization of equipment versus fair market value is true cashflow impact. We wanted to show that one to show a little bit more of what we are doing. But I will ask for further patience as we try to look for the best way to give you what you are asking for, which is more concrete thinking about how we are getting to the $200 million impact. But is it fair to assume that 2018 is going to be a bigger benefit versus 2017? Just as you ramp to that $200 million number, that seems like a reasonable assumption. Absolutely. That is fair. The exact quantification of that is what we want to put some more thought to. What I can say is this, Seth. As we look at how the projects in aggregate are tracking versus the targets that were laid out when we kicked off Project XL, we are performing very nicely against those targets. So the ramp up on the metrics that each initiative uses, is in aggregate nicely ahead of the targets that we have laid out. But when we communicate something out, we want to make sure that it is useful and clear. And right now, there is too much analysis and discussion we would have to give in order to relate the measures that we have to the $200 million run rate that we are targeting. Okay. I will ask again for your patience. I will ask you again next quarter then. I am sure you will. By then it should be embedded in our guidance. All right. Thanks, guys. Thanks, Seth. Thank you. Our next question comes from the line of Steven Fisher from UBS. Your question, please. Steve. Thanks. Good morning. Morning. I know you guys said that you do not know what the market is going to do in terms of CapEx going forward, but to what extent are you actually seeing some discipline and restraint in the market today? If you are seeing some general discipline, is it more on the pricing side or on the CapEx side? I am wondering if, given the robustness of the conditions that you are seeing out there, if you would have ordinarily expected to see other players now already putting more CapEx into the environment where we are. Steve, this is Matt. I would say that we are seeing both. We are seeing discipline, and we measure it by absorption, and we have been seeing that for the entire year. Really starting fourth quarter last year, that the discipline on the capital spend versus the incremental demand has yielded positive absorption, and we think that is played out into stabilizing rate and given us the opportunity to get pricing where it was pre-2015. So, I would think that the industry has been disciplined on both fronts. Is consolidation having any real impact there, or what else do you think is driving it? Yeah, that's a hard one to quantify. I would say, based on basic economics, that consolidation could be helping. How much? It's hard to say. What we try to do, though, is just to make sure that we're looking at the market realistically, and we're taking actions in a disciplined way. If we continue to do that, and if the rest of the industry continues to do that, we certainly think that it should position the industry to perform better. Okay. Can you just remind us of the timing of repricing of all your national accounts contracts and, if it's around the next couple of months, what extent would this quarter's results set you up for stronger pricing as you head into those discussions? It's not really on a calendar schedule anymore, Steve. We actually intentionally try to address those throughout the cycle. It makes it easier for our team and with the acquisitions, it was just some triggers that actually made it necessary to harmonize some set pricing at different times. So there's not really an annual trigger like maybe four or five years ago where we were doing everything in Q4 and Q1. It's a little more spread out now. Okay. Thank you. Thank you. Thanks. Thank you. This does conclude the question and answer session of today's program. I would like to hand the program back to Mr. Kneeland for any further remarks. Well, I want to thank everyone for joining us on today's call. Our third quarter investor presentations are available online, if you have not had a chance to see it. Obviously, you can reach out to Ted Grace, our head of IR, with any additional questions. It has been a busy year, and we are looking forward to starting 2018 with a lot of momentum. So stay tuned for our next call. Thank you, and have a great day. Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.